Wednesday, August 21, 2013

unclean hands destroys false advertising damages award

After expressing sadness that the parties had not decided to
chill, Mattel, Inc. v. MCA Records, Inc., 296 F.3d 896 (9th Cir. 2002), the
judge turned to the “raft
of unfocused issuesraised
by the parties.”After a 9-day trial
on FLIR’s claims and Fluke’s counterclaims, the jury returned a verdict in
FLIR’s favor on its false advertising claim, awarding $103,000 in damages.The jury also returned a verdict in Fluke’s
favor on some of its false advertising claims, awarding over $4.1 million in
damages.Further motions followed.

Defendant Sierra (Fluke’s media/marketing company) moved for
a fee award based on the court’s conclusion at summary judgment that FLIR
lacked prudential standing to sue Sierra for false advertising since they
weren’t competitors (even though contributory liability would seem possible
given appropriate facts, as I noted in an earlier discussion).Sierra argued that FLIR’s claim against it
was groundless; FLIR relied on Second Circuit cases, but the court found that
the Ninth Circuit has a different standing test.FLIR argued that it was merely making a good
faith attempt to extend the law of the circuit.Sierra also argued that the claim was factually groundless because FLIR
knew Sierra wasn’t a competitor.But
that didn’t matter to FLIR’s legal theory.Also, the court didn’t find bad faith or unreasonable litigation conduct
against Sierra.

Despite the court’s strong finding in Sierra’s favor, the
judge wasn’t ready to say that FLIR’s stance was legally groundless or that it
rested on “absurd” or “just short of frivolous” contentions of law. There were
some 9th Circuit cases that arguably provided some support for its
position, though they were distinguishable, e.g., a case finding that a
defendant’s corporate officer was individually liable for false
advertising.Thus, this was not an
exceptional case.

Fluke also asked the court to adopt the jury’s factual
findings on Fluke’s unclean hands defense and enter judgment for Fluke on
FLIR’s false advertising claim.FLIR
sued Fluke over allegations that Fluke’s drop test video falsely depicted the
abilities of both parties’ cameras to withstand a two-meter drop onto
concrete.The jury found for FLIR, but
also found that FLIR falsely advertised its E-series cameras’ ability to pass a
two-meter drop test.The court applied
the clear and convincing evidence standard to determine whether FLIR’s damages
award should stand; the jury found FLIR’s statements false by a preponderance
of the evidence, so the court had to make its own determination.

Unclean hands requires inequitable conduct with an immediate
and necessary relation to the subject matter of the plaintiff’s claims.For false advertising, the unclean hands must
relate to the same type of product. The extent of harm caused by the plaintiff
is relevant, but the defendant need not show prejudice.

FLIR argued that its conduct wasn’t inequitable because it
believed in good faith that it could meet the two-meter drop test when it
submitted that specification for publication six months in advance of the
release of its new E-series.It also
argued that its conduct wasn’t related to Fluke’s drop test video and
methodology because FLIR didn’t falsely depict the results of a particular drop
test, deceptively compare the parties’ cameras, or deliberately include the
“stamp of approval” of a purportedly “independent, third party” as Fluke did. The
court disagreed and found clear, convincing evidence of inequitable conduct
related to the subject matter of the other party’s false advertising.It didn’t matter that FLIR’s ad wasn’t
comparative: both false ads were about the same product, a thermal imaging
camera, and the same drop test.Plus,
FLIR’s claim was in response to the advantage it perceived Fluke was gaining
with its drop test claims.

The falsity of FLIR’s claim was uncontroverted; internal
results reported “[s]erious failures in every drop” and an internal email among
high-ranking employees stated, “at launch we don’t we think we can have [a]
camera that withstand[s][a] 2m drop.”Two
million individuals apparently received the catalog with the false claims in
hard copy.FLIR argued that it acted in
good faith by attempting to correct the print version, but it was too late to
remove the 2-meter drop test specification because it had already gone to
print.But there was no evidence FLIR
ever tried to remove the specification from the associated website, which could’ve
been done.The timing was bad: “FLIR
made a representation to a major distributor in August 2010—the same month that
this suit was filed—knowing at the time that it was not yet true.”

Thus, FLIR was not entitled to the jury’s award of $103,000
in damages for Fluke’s false advertising because of its own inequitable
conduct.(I thought damages were a legal
remedy.But this whole law/equity thing
has rarely made much sense to me.)

Unclean hands didn’t preclude injunctive relief, though,
given that the law involved was really for the protection of the public.A material, literally false statement with a
tendency to deceive justifies an injunction. The voluntary removal of the drop
test video (which the court found wasn’t entirely successful, since it could
still be found online) was insufficient.

As for attorney’s fees and costs, the court noted that there
could be more than one prevailing party when there were multiple claims: fees
could even be awarded to both parties, given that a single Lanham Act lawsuit
can have distinctly different claims that can be treated as if they’d been
raised in separate lawsuits.So, the
court undertook a situation-specific exceptionality inquiry turning on “the
nature of the conduct for which the opposing party was held liable or which was
enjoined,” and not on FLIR’s inequitable conduct. FLIR was a prevailing party on its claim, and
the case was exceptional. Though FLIR didn’t get damages, its judgment and
injunction benefited consumers and vindicated its right to a market free of
false advertising.Fluke’s deliberate
publication of a literally false ad warranted a fee award.

Literal falsity required a showing that the drop test “was
not sufficiently reliable to permit one to conclude with reasonably certainty
that the test established the proposition for which it was cited.” And the evidence there was abundant, including:
(1) Fluke used essentially a home-made drop apparatus; (2) Fluke did not
subject its own comparable camera to the drop test; (3) FLIR’s cameras were
placed in far more precarious positions; (4) Fluke’s own employee extensively
participated in what was supposed to be an independent test; and (5) Fluke was
never able to produce the camera shown in the drop test video.

Fluke also sought judgment in its favor on its
trademark-related claims, while FLIR argued that its claims were barred by
laches and that Fluke’s “IR Fusion” trademark was invalid.On laches, the court looked to the two-year
statute of limitations for fraud, which begins to run when a party knew or
should’ve known about its potential claims.The jury determined that Fluke knew or should’ve known of its potential
claims by April 15, 2008, but it didn’t pursue its claims until after FLIR sued
in in August 2010.

(A presumption of both unreasonable delay and prejudice
arises after two years, but the presumption evaporates if there are disputed
issues of material fact about the claimant’s knowledge.The court seemed to hold that this was also
true of the presumption of prejudice, though logically I don’t see how that’s
entailed—there was a factual issue on when Fluke knew or should’ve known of its
claims, obviously precluding summary judgment, but once that’s been resolved
against Fluke and thus we know Fluke delayed more than two years after it knew
about its claim, why shouldn’t we go back to presuming prejudice?Still, the court found that, having gone past
summary judgment, the burden was on FLIR to show prejudice by a preponderance
of the evidence. Fortunately for FLIR, ti did so here.)

The facts underlying the delay: In Sept. 2007, Fluke’s
senior product marketing manager informed over 60 Fluke employees that FLIR had
“introduced some new thermal imagers with what they say is ‘F[LIR] Fusion.’”Seven months later, Fluke’s counsel sent a
C&D stating that FLIR’s use of IR FUSION infringed Fluke’s IR Fusion mark.The jury found that this was the point at
which Fluke knew or should’ve known of its trademark-related claims.Shortly thereafter, FLIR’s counsel responded,
disputing the validity of IR-FUSION as a mark and denying that it made any use
of that term “in a trademark sense, versus a descriptive, generic, or other
sense.”However, to avoid dispute, the
letter continued that FLIR had taken “reasonable steps to avoid any use of the
term ‘IR–FUSION’ in any way that could even be argued to be a trademark use,”
including removing uses of the term on its website and in marketing
materials.The letter continued that, “although
FLIR plans to aggressively promote its own fusion functionality, FLIR has no
intention of registering ‘IR–FUSION’ as a trademark or domain name.”This clearly indicated that Fluke knew that
FLIR contested the validity of the mark and intended to continue promoting
fusion functionality; all it agreed to do was stop using the specific term “IR
Fusion.”

In December 2008, Fluke conducted a survey, which found that
consumers “expect[ed]” thermal imagers to have “[f]usion,” which they
“[a]ttributed to F[LIR],” and found “NO differentiation in performance of
[f]usion by brand.”Fluke’s own branding
expert testified that Fluke was less than diligent in enforcing its claimed
mark (it apparently missed one FLIR use of IR-Fusion in September 2008, after
the agreement to stop). Fluke still didn’t send a second C&D until August
2010, until after FLIR expressed concerns about the drop test video.A relevant Fluke employee testified that she
monitored FLIR’s advertising when she took her position in June 2009, and that
it was standard practice to do so; she noted FLIR’s ads using fusion and
fusion-related terms.

As the court summarized, despite this knowledge, and despite
the survey “showing, in Fluke’s view, arguable dilution of Fluke’s trademark
that it considered its most important intellectual property, Fluke did nothing
further to protect itself.Instead,
Fluke appears to have set out on a course of almost vigilante-like punishment
of FLIR” with the false drop test video.“[R]ather than enforce its trademark, Fluke chose to ignore those rights
in favor of a frontal assault on the FLIR product line as less rugged than the
Fluke thermal imagers, and the jury determined it did this with false
advertising.”Only when Fluke discovered
that its media/marketing company had received document requests about the drop
test video did it raise trademark claims.

FLIR’s employee testified without contradiction that FLIR
invested heavily in marketing its fusion functionality, by that name, during
this period, and that it would’ve done something else to resolve the issue if Fluke
had pressed its objection earlier.The
court relied on “the public association that FLIR has built between the term
fusion and its thermal imagers, as demonstrated (at its infancy) by Fluke’s
December 2008 consumer survey.”

Expectation-based prejudice would be sufficient, but Fluke’s
delay also caused evidentiary prejudice: at trial, Fluke’s counsel attacked
FLIR’s secondary meaning survey because it was conducted in 2012, several years
after the marketplace had been subjected to FLIR’s alleged infringement.But based on Fluke’s extended lack of
objection, it was “hardly surprising” that FLIR didn’t have an earlier survey.And Fluke was “adamant” that the jury be
instructed that timing was important because the crucial date for determining
secondary meaning is the date on which the alleged infringer entered the
market.“Fluke cannot argue to the jury
on the one hand that this survey by FLIR is entitled to little weight given its
timing, and later argue that FLIR’s evidence was not negatively affected by the
delay in its origination.”The weight
accorded to FLIR’s survey was vital to its defense given that “IR Fusion” was
at best a descriptive term that needed secondary meaning for trademark
protection.

Fluke argued that FLIR’s willful infringement justified
rejecting laches.But the evidence was
insufficient to demonstrate that FLIR knowingly engaged in infringement. Before
FLIR asked Fluke’s marketing company for the drop test evidence, Fluke
submitted an application to the PTO stating that “Those skilled in the art [of
thermography] call th[e] merging of images ‘fusion’”; that’s the kind of
evidence that makes a belief in descriptive use reasonable.

Laches generally doesn’t bar prospective relief, and the
court found that a prospective injunction could be fashioned in a way that
wouldn’t prejudice FLIR (presumably by only barring it from using “IR Fusion,”
at least I’d hope so) and protect Fluke.Fluke’s entitlement to an injunction “weighs heavily” in favor of
awarding it attorney’s fees.(Hunh?This has got to be the wrong standard;
winning doesn’t constitute exceptionality.There may be more in the court’s desire for the parties to have chilled.)The court would consider the “unlawfulness of
FLIR’s conduct” at a later hearing on the terms of the injunction.

Turning to FLIR’s invalidity argument, FLIR argued that both
“IR Fusion” and “fusion” were “descriptive of the technological process of
blending infrared and visible light images, and no secondary meaning exists
with either of these terms.” The court
had little difficulty concluding that IR Fusion was descriptive, as Fluke’s own
arguments indicated.Fluke’s own survey
showed that consumers consider fusion technology “‘table stakes’ (i.e., a basic
feature included on a thermal imager) and ‘expect products to have Fusion.’”The real issue was proof of secondary
meaning.The burden of proving secondary
meaning didn’t shift just because the PTO registered the mark, absent evidence
that the PTO registered the mark upon finding that it had acquired secondary
meaning.(This is some incentive not to
push too hard to get your descriptive mark deemed suggestive by an examiner
unfamiliar with the relevant terminology; if a court later disagrees with the
classification, you’re in trouble.)Here, because the PTO registered IR Fusion without requiring proof of
secondary meaning, and because IR Fusion was actually a descriptive term, Fluke
bore the burden of proving secondary meaning at the time FLIR began its
allegedly infringing activities.

The court considered FLIR’s entitlement to judgment as a
matter of law or a new trial on validity “close.”(Then how could the court even be considering
fees, even absent laches?On the drop
test video, it makes some sense to call Fluke’s conduct exceptional given that
it really should’ve known better than to use such a biased test.The same doesn’t seem true here.)Fluke presented some evidence on various
circumstantial factors considered for secondary meaning, but not much over a
year after Fluke became aware of FLIR’s “F Fusion” cameras, and just six months
after the PTO registered IR Fusion, Fluke’s survey indicated that consumers
expect thermal imagers to be equipped with fusion technology. “If consumers considered fusion technology ‘table
stakes,’ ‘expect[ed] products to have Fusion,’ and saw ‘NO differentiation in
performance of Fusion by brand’ in December 2008, it seems highly unlikely that
the significance of the term ‘IR Fusion’ in the minds of the consuming public
could have been anything other than a feature of the product or any thermal
imager a little over a year earlier.”

FLIR’s secondary meaning survey, conducted in 2012, also
supported FLIR’s position.Secondary
meaning requires that a significant or substantial part of the buying class use
a term to identify a single source.Figures of 46% and 37% have been found sufficient, but FLIR’s survey indicated
that: (1) 34% of respondents associated the term “IR Fusion” with thermal
imaging cameras; (2) 9% associated the term “IR Fusion” with Fluke; and (3) the
measured level of secondary meaning in the term “IR Fusion” was only 7%. True, that was in 2012, but given the 2008
survey, it was “doubtful” that a significant or substantial part of the market
thought the term identified a single source in September 2007 or at any other
time. “[T]he evidentiary burden
necessary to establish secondary meaning is substantial where the mark
applie[s] to an article designate[d] a principal ingredient desired by the
[buying class].” The survey could simply show that the public never identified
fusion with Fluke regardless of infringement; likewise, the December 2008
survey results might have been as much or more due to FLIR’s earlier
development of fusion functionality as to any FLIR advertising in 2008.

But the court ultimately concluded that laches offered the
clearest reason that Fluke’s damages award couldn’t stand.Laches mooted secondary meaning, accounted
for FLIR’s prejudice, and allowed the court to address injunctive relief as an
appropriate framework for defining Fluke’s protection, so there was no need to
rule on invalidity as a matter of law/a new trial.(Hunh?FLIR’s argument, which the court makes seem well taken, is that Fluke is
entitled to zero protection for “fusion”
and “IR Fusion.”I don’t see how
the court can avoid resolving invalidity if it's going to consider injunctive relief. Perhaps it's planning to find mootness if FLIR promises not to use "IR Fusion" again?)

Finally, the jury found false advertising in two FLIR ads.FLIR argued that Fluke didn’t show the scope
of the use of the ads and that FLIR had ceased all use of the ads and
instituted controls to prevent their further use. Voluntary cessation moots the
need for a permanent injunction, if the cessation is “irrefutably demonstrated
and total.”The court found it to be so
here.

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